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Can Gilead Sciences Squeeze $12 Billion From Kite Pharma?

Gilead Sciences, Inc.(NASDAQ: GILD) just took a bold leap into the unknown with an agreement to acquire Kite Pharma Inc.(NASDAQ: KITE) for $180 per share or about $11.9 billion. Gilead's last 11-figure bet turned out to be one of the best investments in biopharma history, and it's tempting to believe the company can catch lightning in a bottle once again.

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Unfortunately, this deal is nothing like the Pharmasset purchase that helped Gilead become one of the most profitable drugmakers of its time. The commercial viability of CAR-T therapies, which involve withdrawing, modifying, and then reintroducing patient cells, is a big scary question mark. Despite the challenges, Gilead thinks it can make this deal cash flow positive within a few years. Here's what's standing in the way.

What Gilead's getting

Kite Pharma's lead candidate for the treatment of aggressive non-Hodgkin lymphoma, axicabtagene ciloleucel (axi-cel) has brought hope to dozens of patients that had relapsed after running through existing treatment options. During clinical trials underpinning applications under review in the U.S. and EU, a stunning 39% of patients treated with a single infusion of axi-cel were in complete remission at a median follow-up of 8.7 months.

Unfortunately, axi-cel and other CAR-T therapies can be too effective. Destroying heaps of cancer cells might seem like a good idea, but when too many burst in the bloodstream at the same time, it can cause dangerous side effects for fragile patients who have been battling cancer for years. In fact, axi-cel and other CAR-T therapies have been associated with several cases of fatal brain swelling.

I think the benefits outweigh the risks and expect the Food and Drug Administration to grant axi-cel an approval on or before the predetermined Nov. 29, 2017, action date. That said, the drug label will probably be a complicated one that requires oncologists to jump through an unusually long series of hoops before they can prescribe the treatment.

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Huge benefits for small groups

With a huge advantage over existing treatments, peak sales expectations for axi-cel that top out around $2.6 billion per year seem a bit tepid when you look at successful blood cancer treatments. For example, Celgene expects sales of its multiple myeloma treatment Revlimid to reach $8 billion this year.

Before you begin hoping axi-cel or any follow-on therapies Kite is developing will eventually put up Revlimid-size sales figures, you need to understand big advantages Celgene's megablockbuster enjoys. It's an easy-to-swallow capsule that's also relatively cheap to manufacture, deliver, and store. It's also approved for the treatment of newly diagnosed cancer patients, many of whom keep taking it indefinitely.

In stark contrast, axi-cel and similar treatments involve a single transfusion, so you can forget about recurring sales. You can also forget about reaching larger populations of newly diagnosed patients. Given the safety issues we've already seen, a first-line approval for any CAR-T therapy seems highly unlikely. Oncologists will have enough trouble weighing the risks and benefits for advanced-stage patients that have already tried safer alternatives.

If a relatively small addressable patient population weren't enough of a struggle, extraordinary manufacturing challenges are sure to squeeze axi-cel's profit margins. Remember, oncologists can't prescribe CAR-T therapies like a bottle of pills or hook patients up to an IV bag already in storage at a treatment center. Each patient must have his or her own immune cells withdrawn, sent to a manufacturing facility to be modified, then sent back to be reintroduced.

Kite showed some initiative by opening a big manufacturing center earlier this year. Located near the Los Angeles airport, the facility is expected to be capable of producing up to 5,000 patient therapies per year with a 14-day turnaround. Kite didn't disclose how much it spent building the 43,500-square-foot facility, but investors will want to keep an eye on how much Gilead needs to spend to safely manufacture each patient's therapy.

Competition ahead

In 2012, Gilead spent $11.2 billion to acquire Pharmasset and Sovaldi, a drug that forms the backbone of a hepatitis C franchise that racked up $46.4 billion in sales during the three years between the beginning of 2014 and the end of 2016. If safety manufacturing issues don't make repeating this level of success with the Kite Pharma acquisition impossible, the competition might.

Kite's axi-cel already produced stellar results in clinical trials that support an application under review by the FDA for the treatment of patients with non-Hodgkin lymphoma. Kite, and now Gilead, anticipates a decision by the end of November, but there's a good chance Novartis(NYSE: NVS) could launch a contender nearly two months earlier.

The Swiss pharma giant submitted an application for its CAR-T therapy, CTL019, ahead of Kite's. If both earn an approval on or before their respective action dates, they won't run into each other right away. Axi-cel is aimed at non-Hodgkin lymphomas, while CTL019 is lined up to treat younger patients with acute lymphoblastic leukemia.

Competition from Novartis and a handful of smaller biotechs with a focus on cell-based cancer therapies could get intense, but not nearly as troubling as potential safety and manufacturing headaches are right now. Despite the obstacles, I'd say Gilead has a solid chance to realize a modest return on its acquisition of Kite Pharma. Just don't expect CAR-T drugs to generate anywhere near $46.4 billion in high-margin revenue over the next few years.

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